It is commonly misunderstood that bankruptcy cannot eliminate any tax liability. Although treatment of tax liability is one of the most complex aspects of consumer bankruptcy law, the Bankruptcy Code does offer many debtors substantial income tax relief. Whether or not your bankruptcy filing relieves your tax debt depends on several factors including the nature and the status of tax liability and the type of bankruptcy proceeding. Remember, only individuals can discharge certain tax debts, not businesses.
An individual can discharge debts for taxes in Chapter 7 bankruptcy only if all of the following conditions are true:
- They are only personal income taxes. Taxes, other than income taxes, cannot be dealt with in either Chapter 7 or Chapter 13 bankruptcy. Bankruptcy will not relieve liability for excise taxes such as estate and gift tax, sales tax, or fuel taxes and taxes for which the debtor was responsible for collecting from others such as payroll taxes withheld from employees.
- You did not commit fraud or willful evasion. Bankruptcy will not relieve liability if you filed a fraudulent tax return or otherwise willfully attempted to evade paying taxes, such as using a false Social Security number on your tax return.
- The debt is at least three years old. To eliminate a tax debt, the tax return must have been originally due at least three years before you file for bankruptcy.
- You filed a tax return. You must have filed a tax return for the debt you wish to discharge at least two years before filing for bankruptcy.
- You pass the “240-day rule.” The income tax debt must have been assessed by the IRS at least 240 days before you file your bankruptcy petition, or must not have been assessed yet. (This time limit may be extended if the IRS suspended collection activity because of an offer in compromise or a previous bankruptcy filing.)
Dischargeable taxes are eliminated in Chapter 7 and are treated as general, unsecured creditors in Chapter 13. Secured tax liens cannot be discharged in Chapter 7. The secured portion of tax liability must be paid during a Chapter 13, in full and with interest, but without further penalty.
If you have tax debts, contact me today for a free initial consultation. You have nothing to lose. No two situations are the same, but Bankruptcy may be the answer for you.